Joining the dots
However out-of-step the dollar optimists were with mainstream opinion yesterday they had the last laugh when the Fed revealed its "dot plot"* of policymakers' expectations. Three, not two rate increases are now on the cards for 2017 and the US dollar is up by 1% on the day against the second-placed British pound.
Investors were so sure that America's benchmark rate would be raised yesterday that the futures market even priced in a slight chance of a 50-basis-point increase rather than the 25-basis-point rise that most expected and the FOMC eventually delivered. In theory, then, raising the target range for the Federal Funds Rate from 0.25-0.5% to 0.5-0.75% was a disappointment and should have depressed the US dollar. However, the Economic Projections indicated three further increases next year rather than the two suggested previously.
The prospect of an extra quarter-point rate increase in the next 12 months does not look particularly significant until it is considered as a midpoint of 1.375% for the Funds Rate that was 0.375% yesterday morning. Investors' knee-jerk reaction was to sell the dollar when they saw the expected quarter-percentage-point rate increase but they hoovered it up when they saw the new dot plot.
Whilst the Fed rate decision was by far the biggest item on Wednesday's agenda it was not the only one. Britain reported on the employment situation and there were retail sales figures from South Africa and the United States.
For the record, retail sales were slightly up in the States and slightly down in South Africa. Nobody really cared. Nor was anyone particularly interested in the -0.4% monthly fall in US industrial production or the 1.3% annual increase in US factory gate prices.
They paid rather more attention to the UK employment data. The number of jobseekers was up by 2,400, a little under half the expected number, and unemployment was steady at 4.8%. More significantly average earnings rose by an annual 2.5%, more than double the pace of inflation. The data might not do anything for interest rates but they are positive for the UK economy.
SNB & NB & BoE
Three more central banks deliver monetary policy verdicts today. UK retail Sales for November will be revealed this morning and the US inflation figures appear after lunch.
The Swiss National Bank, Norges Bank and the Bank of England are all expected to leave their benchmark rate unchanged at -0.75%, 0.5% and 0.25% respectively. Investors will be looking for the minutes to confirm that no further rate cuts are under consideration by the BoE's Monetary Policy Committee.
UK retail sales in November are unlikely to have risen as strongly as they did in October but should still have been higher on the month. Inflation in the States is supposed to have ticked up from 1.6% to 1.7% but now the Fed has spoken the number doesn't really matter. The Bank of Canada's Stephen Poloz will hold a press conference this afternoon.
*Five years ago the US Federal Reserve introduced a new tool to provide guidance on where interest rates might be in the future. Each member of the Federal Open Market Committee estimates a range of where the Funds Rate should be in one, two and three years' time and in the longer run. The midpoint of each member's range is shown as a dot on a chart of rate over time and the FOMC publishes that dot plot at the end of the meeting as part of its Economic Projections. Investors tend to focus on the median dot; the one in the middle of the bunch. https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20161214.pdf